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Discover: Earnings Blowout Winner

NEW YORK ( TheStreet) -- Discover Financial Services (DFS - Get Report) was the big winner among the largest U.S. financial names on Thursday, with shares rising over 7% to close at $39.71.

The broad indexes all rose 1% after the Labor Department reported that initial jobless claims fell 26,000 in the week ended Sept. 22 to 359,000 from an upwardly revised figure of 385,000 in the prior week. The four-week moving average was 374,000, a decrease of 4,500 from the previous week's 378,500.

Jefferies analyst Ken Usdin said that recent data offered "additional confirmation of the housing recovery, with most reports positive," and that "home pricing data is particularly encouraging as it should help banks turn the corner on mortgage and home equity charge-offs given the potential for lower severity."

Usdin said that housing market sentiment was "at pre-crisis levels." Supporting a very bright theme for bank stocks, the analyst said "the National Association of Home Builders (NAHB) Housing Market Index (HMI), a survey of housing market sentiment, is now at its highest level since June 2006," and that "expectations of future sales are climbing higher, pointing to better future activity."

The KBW Bank Index (I:BKX) was up over 1% to close at 49.76, with all but four of the 24 index components showing gains, except for First Niagara Financial Group (FNFG), which was down a penny, closing at $8.07.

Discover on Thursday reported earnings of $627 million, or $1.21 a share, for its fiscal third quarter ended Aug. 31, soundly beating the consensus estimate of a profit of $1.03 a share, among analysts polled by Thomson Reuters.

In comparison, the company earned $537 million, or $1.01 a share, the previous quarter, and $642 million, or $1.18 a share, a year earlier.

The sequential earnings improvement reflected a $182 million release of loan loss reserves during the fiscal third quarter. During the previous quarter, the company released $110 million in reserves.

While earnings were down slightly from a year earlier, EPS was up, because of the company's share repurchases. Discover bought back roughly 10 million shares for $350 million during the fiscal third quarter. Total shares outstanding declined by 1.9% during the quarter.

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